Czech interest rates, inflation, and material prices are to blame for decreased house development

7 July 2023

The year-on-year decrease in construction output in May, reported today by the Czech Statistical Office (ČSÚ), was also reflected in the number of housing starts in the Czech Republic. They fell by 35 percent year-on-year compared to last May’s record-breaking month. The number of completed residential properties rose by 3.1 percent year-on-year, with 2,966 units completed. According to analysts, the main culprit is the cooling of demand for residential real estate caused by high interest rates, inflation and high prices of construction work and materials. This discourages many investors and forces them to postpone residential projects further.

“Since the beginning of the year, the number of new housing units under construction has fallen by one-fifth, with fewer than 40,000 new housing units being built annually. This year’s double-digit decline also affects Prague and the Central Bohemian Region, which are the most interesting regions from the point of view of developers, among other things thanks to the traditionally highest prices,” said Petr Dufek, the chief economist of Banka Creditas. He added that the construction industry and housing construction are experiencing a weaker period this year and will most likely end 2023 with a decline. However, reduced demand from construction companies could in turn lead to a normalisation of prices of building materials, which rose sharply last year.

According to Jan Vejmělka, Komerční banka’s chief economist, the uninspiring view of residential statistics is mainly due to comparisons with last May’s record-breaking year. According to the ČSÚ, construction started on 5,309 units in May 2022, a quarter more than a year earlier.

In contrast to the situation in public procurement, the Construction Industry Association finds it difficult to estimate the development of private investment and therefore of residential construction. Nevertheless, according to Jiří Nouza, president of the association, it is evident that stagnation or even a slight cooling in housing construction is taking place. “This situation is mainly due to the uncertainty of what will happen on the housing market. There are many unknowns and it is very difficult to predict future developments. So far, there have been some shifts and delays in projects by investors, which may have an impact on the volume of construction production as such in the future,” Nouza added.

While residential construction will continue to stagnate, Czechs will prefer to reconstruct existing housing, according to Ondřej Boreš of Velux. “One of the most common reasons for renovations is to reduce housing costs. The most popular ways of reducing energy costs are building solar panels, insulation or replacing windows,” Boreš said.

Construction output in the Czech Republic fell again year-on-year by 2.7 percent from a revised 6.4 percent in April, according to ČSÚ data. Month-on-month, it rose by one percent. The year-on-year output of civil engineering construction was higher by 3.9 percent, while civil engineering fell by almost one percent. Compared to last May, the number of building permits issued fell by 11.4 percent. The indicative value of these permits rose by 16 per cent to CZK 58 billion.

Source: ČSÚ and CTK

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